Observations on Ways to Make Farm Profitable for the Next Generation

In last month’s article we discussed whether or not the next generation can afford to take over the farming operation.  I received a lot of feedback on the article and one response stuck with me.  The question was posed, if the farm is not making ends meet now, how can it then be profitable to the next generation, especially being profitable enough for to bring in the next generation?  

          It was a very good question and had me thinking on a response for quite some time.  I will first lay out a disclaimer (we attorneys are good at doing such) and say that I am not a farm economist.  Nor am I versed in financial advising.  In addition, not every farm is going to be helped by what I write in this article, nor is what I write about a good fit for everyone.  I am merely going of off 14 years of law experience and having worked with hundreds and hundreds of farmers running just about every type of farm operation there is.  Here goes:

1.       Farm Structure:  The sooner a famer can structure their farm as a legal entity the better.   I prefer using an LLC, or multiple LLCs, because they are easy to maintain, cost effective to set up, provide excellent liability protection, and give great tax flexibility.  Your farm is a business, so set it up as one.   The benefits you will see are many.

2.       Self Employment Tax:  Often times a tax savings can be achieved by setting up the land in one LLC and leasing it to the farm operation LLC.  In other words, being your own landlord can save on self employment tax.  Although in leaner times the savings will be less, in good times I have seen clients save tens of thousands of dollars in self employment tax.  Consulting with your CPA on this is recommended.

3.       Insurance:  Maybe it is just me, but it seems like every year insurance premiums go up.  As far as liability insurance, a million dollars does not cut it anymore.  A farm should have a few million dollars.  But where does it end?  Well, having the farm set up properly in the form of a farm operating LLC can alleviate the need for higher liability insurance coverage and save money. 

4.       Payments to successor farmers:  Say we have a farm couple, Jack and Dianne.  And, they have a son, John, who wants to return to the farm.  However, the farm cannot support two families, and it is not in the budget to fully pay John for working on the farm.  I have seen in these instances where instead of getting a full wage, Jack and Dianne transfer membership units of their LLC to John as compensation.  I totally get the fact that one cannot live off of LLC membership units.  However, if the farm can pay John some sort of wage, then payment by way of LLC membership units can be a great supplement. 

5.       Non Farm Business:  I have clients that have all sorts of side businesses that provide outside income.  From excavating companies, drainage companies, machinery repair…you name, they do it.  Especially if there is synergy for the side company to co-exist with the farm operation.  For instance, you start an excavating business and use your farm shop, tools, etc, for the business.  Obviously this will drastically cut down on start up costs.  My observation is that in tough times, sometimes the side company is what pulls the farm through. 

6.       Farm Service Agency Loans:  I’ve heard varying opinions about obtaining FSA loans over the years.  However, they have low interest rate, long term amortization terms, and the amounts have been increased as of late.  Some of these loans have a 40 year repayment term which can spread out payments and keep them lower and easier to keep current during lean times.  For young farmers trying to purchase land or equipment, sometimes these loans will make all the difference in the world.

7.       Diversify:  In several instances, I have had instances where a client has a farming operation that is simply unable to support another family member coming into the fold.  In these instances, the clients diversified into contract livestock growing, specialty crops, or other types of farming besides conventional row crop farming.   I have several clients that have gotten into contract growing.  These clients, depending on the livestock involved, tell me the earnings can be $80,000 to $120,000 per year.  That surely sounds like enough income to enable another member of the family to come on board.  My main concern with these types of arrangement is that the farmer is at the mercy of the company they are growing for.  So, one should greatly do their homework on who they are getting involved with and know the ins and outs of the contract that will govern the arrangement.   Contract growing may not be for everyone, but several of my clients say they could not make ends meet without it.

8.       Get help with grain marketing:   Most farmers would agree that marketing grain is tough.  Over the years, I finally conceded that whatever I did would be wrong, it just came down to was I a little wrong or a lot wrong in a given year.  However, if you can average a decent price that is above cost of production, that will cover a lot of sins.  Clients that have done the best with marketing have engaged firms to help them and, by in large, it seems to have paid off.   A lot of farmers are spooked by hedge to arrive contracts (HTA’s) and options.  But, once you get versed in them, you’ll likely never want to return to straight forward sales due to the increased flexibility.  I know that was the case with me.

In the end, we all know there is no magic bullet when it comes to making a farm profitable.  In the times we are currently in, no matter what is done, some operations are going to have a hard time being profitable.  However, if the goal is to get the farm as profitable as possible so as to either a) bring in another family member or b) give the next generation he best chance possible to succeed, then all options should be on the table and we should continuously be looking at various options to be explored.  The suggestions in this article may or may not be applicable to your situation, but for many of the farmers I have worked with, they have been.